Setting rental rates is one of the most crucial aspects of property management. However, calculating an appropriate cost of rent for a given unit can be surprisingly challenging. If you set the rent costs too high, you’ll find it hard to attract potential renters. Set rental fees too low, however, and you’re leaving money on the table.
How can you set rental rates that are just right so your renters will happily sign a rental contract, but you’ll still turn a reasonable profit after factoring in your overhead and maintenance costs?
Here are a few tips for what you should do when setting rental rates for your properties:
1: Check the Rental Rates of Similar Properties in the Same Market
One of the most basic rules of competition is gathering some intelligence on your competitors. What are other properties in the market going for? How long is each property sitting vacant before getting filled? What services/amenities does each competitor property offer?
Having the answers to these questions is a basic requirement before setting rental rates for your own property. After all, how can you stand out from the competition if you don’t know what they’re doing?
As noted by Avail, “You’ll want to be sure you’re looking at units of similar size, with similar features in your specific area.” This is because the closer these other properties are to yours, the more valid the comparison will be. Also, restricting the search to other properties in the same market is necessary because similar properties might go for vastly different sums in other regions.
For example, according to data cited by Abodo, in 2018, the average cost of rent for a 1-bedroom apartment was roughly $1,073 in Florida, while the cost for the same in New York State was about $1,633. Keep in mind that these are state-wide averages—rental rates in individual cities within the same state (or even different parts of the same city) can also vary wildly from one another.
Knowing what similar units are going for in the same market area helps you establish a baseline for what renters in your area should expect. However, that’s not the only thing you should check before setting rental rates for your properties.
2: Check for Special Regulations Restricting Rent Costs in Your Area
Here are two words that many experienced property managers/landlords have learned to hate: “Rent Control.” To those who may be unfamiliar with the term, rent control, as defined by Trulia, “limits how much landlords can charge tenants.” In many cases, rent control places hard caps on how much a property manager can raise the rent on their property from one year to the next.
Renters love rent control because it helps limit the growth of a major living expense—and it provides strong motivation for them to not move away since they would lose the protection of rent control if they did. However, not every city enforces rent control. In fact, according to Trulia, “In the U.S., rent control is currently allowed only in certain cities in California, Maryland, New Jersey, New York, and in Washington, D.C.”
Even in cities with rent control laws, they don’t always apply to a specific property type—or they may apply to a property without your knowledge. So, before determining the cost of rent for one of your properties, it’s extremely important to check for any esoteric rules (of which rent control is just one example) that may govern the rental fees you can charge.
Checking with an experienced attorney specializing in property management law from that market area can be beneficial; as can looking at municipal websites and rent control databases to see if a given property is listed in them.
3: Check Conditions in the Local Market
Aside from seeing what competitors are charging and verifying that your property isn’t subject to rent control or similar rental fee capping regulations, it’s important to inspect local market conditions when setting rental rates.
Because, knowing the local market helps you understand what the market can support. As a matter of fact, it’s typically best to conduct this research before acquiring a rental property so you can be sure it’s a good match for the market it’s in.
For example, if the median income in a given market is less than $35,000 a year, odds are that single renters won’t be able to support a $2,000/month rental rate for a 1-bedroom apartment, seeing as that would be more than half their yearly income. However, that rental fee might be more manageable for a small family with two earners or in a market where median incomes are higher.
This is why it’s also important to consider demographic data such as average family size and earners per household when setting rental rates—areas with more singles than two-earner families will typically support cheaper 1-bedroom units better than costlier units with multiple rooms meant for families.
4: Adjust Rental Rates Based On Your Available Amenities
What special amenities or upgrades does the rental unit have that similar units in the area lack? Or, what amenities are common to the area that your residential property does not offer?
After comparing your rental property to similar units in the target market based on the cost of rent, it’s important to take a look at what amenities your property and others have which might help to serve as a differentiator.
For example, does your rental unit include brand-new appliances? That might be worth paying a little extra for to a new renter. Or, do competitors have some convenient smart home upgrades that make their properties more attractive to some buyers? In that case, it may be worth investing in similar upgrades or knocking a little off of the rental contract to increase the attractiveness of the property.
5: Verify Your Total Cost of Ownership for the Rental Property
When setting rental rates, it is vital that you ensure that the income generated from rent is more than what you need to pay in mortgage interest, property taxes, property maintenance, and management overhead. Shaving down the cost of rent to attract renters can be a great way to fill vacancies, but if you pare down profits too much, it becomes difficult to properly maintain the property—which may cost you renters anyways. It also cuts into your ability to withstand the property being vacant later if a renter chooses to leave.
By tallying up your total cost of ownership (TCO) for a given rental property, you can ensure that your rental fees are high enough to cover your costs while remaining competitive and attractive for the target market. If you find that a property costs too much to maintain to charge a rental rate that would be reasonable, it may be time to offload the property.
Need help managing your property maintenance issues and tracking maintenance activities? Reach out to the HOMEE team today for help and advice!